Entrepreneur’s Wealth Digest
This week, I want to respond to a question we often receive from entrepreneurs who are meeting us for the first time. Many times, they ask us, “How should I evaluate whether working with you is worth what I pay for your services?”
Great news! We have an easy way to calculate our value based on three quantifiable areas, each of which is based on increased merit when compared to you doing things yourself:
How much time do we save our clients, and what is their hourly rate for their business?
How much more do investors working with an advisor receive in investment returns than those doing it themselves?
How much value does tax planning add?
When doing things yourself is no longer an option
Entrepreneurs are generally self-starters with at least some financial acumen. In most cases, entrepreneurs take on the role of personal chief financial officer out of necessity, and keep it, because it generally works well.
Entrepreneur Aligned was created to help entrepreneurs when they reach that point where executing complex tasks themselves is no longer a good option. There may be new and bigger risks for which they require knowledgeable help. The intricacy of maintaining the systems they have built may now be very significant, and their time may be better spent elsewhere. Maybe they have made a mistake or a high-impact event has happened that they would rather not revisit.
Whatever the reason, we exist as a knowledgeable team to take on the responsibility of running your own “Personal Wealth Operating System” so that you can focus on your business and the remarkable life you want to live with your family. Now let us dive into the calculation!
Variable number one - your time
Take your adjustable gross income from your most recent return (1040, Line 11). For the purposes of this example, that number will be $1.2 million.
Divide that number by 2,000 (a round number of working hours per year for your effective hourly rate). In this case, the result is $600 per hour. If you have a higher aspirational rate where you value your time, say $1,000 per hour, use that instead.
Multiply that result by 20 and by 50. In this example those totals are $12,000 and $30,000.
This represents the simple number of hours of time savings we provide to our clients through our work. We even tilt this to the lower end, because the 20-50 hour range are the low and medium volume hours per year that our team spends working for each client family. This exercise assumes that you are doing all of the tasks and reviews we think you should be doing every year as efficiently as our team would be.
Variable number two - returns working with an advisor and without one
Calculate the value of your investments outside your primary business, your primary and secondary homes, and your cash management accounts. In this example, we will use $400,000 across a brokerage account, a 401k and a small venture capital direct investment.
Multiply that figure by 1% and 4% for totals of $4,000 and $16,000.
This represents the potential range of performance outcomes provided by working with an advisor based on industry studies from Vanguard, Russell and Envestnet. In general, working with an advisor allows you to create an investment strategy and stick to it over the long term. Those habits generally improve investment returns over time. Keep in mind these are hypothetical examples of what a potential financial benefit to working with an advisory team could be. You may get a significantly higher benefit or no benefit at all based on your unique situation. Everyone’s situation is different, and this is purely intended to give you an idea of how to evaluate the value of an advisor.
Variable number three - multi-year tax planning
Write down your adjustable gross income from variable number one (1040, Line 11).
Write down your itemized deductions (1040, Line 12).
Write down your quarterly estimated tax payment.
We won’t do a calculation for this third variable because it will vary significantly based on the unique business. Some actions we often consider with our clients are:
Allocating infrequent business expenses to higher income years
Clustering itemized deductions into higher business income years
Meeting safe-harbor requirements and electing when to pay and when not to pay quarterly estimated taxes
These are just a few examples of when tax planning matters, and they are designed to inspire you to analyze what kind of value it can deliver. For the purposes of this exercise, tax planning could possibly reduce the tax burden by an extra 1% ($12,000 of income) per year.
Add it up
Your time - low end of example case - $12,000
Working with an advisor returns - low end of example case - $4,000
Multi-year tax planning – low end of example case - $12,000
Potential direct value of working with Entrepreneur Aligned - $28,000
These numbers do not even touch many of the other valuable services we provide for our clients. We help them clarify financial strategies that best express their vision and values. We help to mitigate risks and work to eliminate single failure points in their financial lives. We help entrepreneurs focus on their families, what they love and their businesses instead of worrying about operating their financial system.
If this article resonates with you, and you would like to have us show you how we can deliver value for your family, please let us know. This is why we are here!
*For more information on Entrepreneur Aligned fees, see our ADV Part 2, Item 5.
If you have a question or simply want to talk through your financial planning, we are here to help.
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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy.
Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams of EA and DC, you can find him chasing his twins, wily trout or a podium spot at an OCR race.